Could the EU regulate ICOs via its Crowdfunding Regulation?

Initial coin offerings have come under increasing regulatory scrutiny. It now emerges that ICOs could be covered in EU proposals for a Crowdfunding Regulation. Could this be the first example of ICOs in EU law?

Raising capital through ICOs on crowdfunding platforms

Earlier this year, the European Commission published draft legislation to regulate crowdfunding platforms uniformly across the EU. See our blog post on the Commission’s fintech action plan for more.

The European Parliament Committee on Economic and Monetary Affairs is now considering the proposals. In a recent report, the lead on that Committee, Ashley Fox MEP, suggested changes to the draft regulation, including extending the definition of crowdfunding services to include acting as an intermediary between a token issuer and investors. This extension would permit crowdfunders to raise capital for ICOs through their platforms.

“This Regulation gives the opportunity to ICOs that want to prove their legitimacy to comply with the requirements of this regulation.”

European Parliament Committee on Economic and Monetary Affairs

What ICOs would be caught by the Crowdfunding Regulation?

For the proposed regulation, ICOs are defined as “a means of raising funds from the public in a dematerialised way using coins or tokens that are put for sale for a limited time by a business or an individual in exchange for fiat or virtual currencies”.

Strictly speaking, the suggested changes to the draft regulation would not amount to the direct regulation of ICOs. But crowdfunding platforms which offer ICOs caught by the new regime would have to, for example, assess whether the ICO is appropriate for prospective investors and provide those investors with a key investment information sheet.

Under the plans, ICOs will only be caught where they:

use a counterparty to issue tokens

fundraise less than €8m

are public sales (as opposed to private placements of coins)

are primary issuances (as opposed to secondary trading).

“Whilst this regulation may not provide the solution for regulating the ICO market, it takes a much-needed step towards imposing standards and protections in place for what is an excellent funding stream for tech start-ups.”

European Parliament Committee on Economic and Monetary Affairs

Equivalence for third country platforms

The report also proposes a form of equivalence for third country crowdfunding platforms. UK platforms will want to track the progress of this provision as it will be relevant to them in the context of Brexit.

Other changes to the original draft Crowdfunding Regulation would see national regulators having more responsibility for supervising crowdfunding platforms and different standards for different types of platform. See our blog post on the FCA’s approach to regulating the UK crowdfunding industry.

What happens next?

The European Parliament and Council of the EU are still at an early stage in the process of negotiating the Crowdfunding Regulation.

The next step is for members of the Committee to propose changes to the report over the autumn and then agree a final report by the end of the year.

At the same time, Member States are considering the proposals in the Council, also with a view to agreeing a general approach to regulating crowdfunding by the end of 2018.

The next stage would be so-called trilogue negotiations between the European Parliament and Council. If these talks begin in January 2019 and conclude quickly then there is a chance that the Crowdfunding Regulation could be adopted in the first part of 2019. However, it would be a race against the clock to finalise the legislation before the end of the parliamentary term in April 2019.

Even if time runs out to implement the Crowdfunding Regulation next year, this latest report is an insight into how EU law could treat ICOs in the future.